How they choose the best pictures is so incredibly arbirtary, and heavy towards the big guys and companies. It's so much so that the little guys, the independents, the unknowns, get phased out and pushed aside in lieu of their big company counterparts. It creates an unfair balance, they deserve equal exposure to the masses and the Oscars takes a lot of that away. So yeah I think the Oscars very much undermine the spirit of artistry.
I'm not sure what criteria the Oscars use to determine what the "Best Picture" is, but it's usually not the movie that most people (at least most people I've actually talked to) think is actually best. Maybe it's what the people voting on them thought was best, but there is probably so much corruption in the whole Academy that nobody should pay much attention to the Oscars anyway.
The Oscars undermine artistry in two important ways. First, by generating so much hype and attention, the industry is aware that the eyes of the world are watching and awards seem to go to movies that are politically correct or those that are relatively non-polarizing and free from controversy. Few people would say that "Tom Jones" was a better film than "The Manchurian Candidate" in 1963 or that "Shakespeare In Love" was a better film than "Life Is Beautiful" in 1998. Secondly, the competitive nature of the Oscars inevitably leaves some of the greatest artistic performances forgotten or unrecognized. Gloria Swanson's portayal of Norma Desmond in "Sunset Boulevard" is one of the most iconic and greatest film performances of all time but the Oscar went to Judy Holliday for the "Born Yesterday" that year (who also beat Bette Davis in "All About Eve"). Al Pachino has always been a powerful actor but his performance in "Dog Day Afternoon" was much more Oscar-worthy than in "Scent of a Woman". John Cazales and Chris Sarandon also deserved Oscars that year for their work in "Dog Day Afternoon" but went home empty handed (Cazales wasn't even nominated). Judy Garland's stunning performance in "A Star Is Born" lost out to Grace Kelly's performance in "The Country Girl". A better system would be to award more than one Oscar for whatever outstanding performances or achievements exist in any given year, rather than make the awards the contest that they are now. This would encourage filmmakers and actors to take greater risks, experiment with innovation, and ultimately elevate the art form.
In any industry, competition makes people strive to do better. Film makers will always desire the feather in their cap of an oscar, and so makes them work hard to achieve it. If the industry were truly only about art, then yes, it would undermine it, but it is a business, and about making money, and the oscars celebrate film that transcend box office ticket sales run-of-the-mill fun and reward true art, so in that respect it does not undermine, but elevates it.
The Oscars do just the opposite, they acknowledge and reward high quality work. After sacrifice and commitment to their work, the Oscars takes the opportunity to show thanks to our best authors. Perhaps there is a lack of coverage for those who aren't mainstream, but this is hardly undermining of an artists nature.